1. Imagine Sharif is a farmer of Arabica coffee beans and needs assistance in modeling this competitive market. We have estimated the demand function be
and the supply function as
Price is measured in British pounds (£), and coffee is measured in millions of bushels
- (a) Be creative. Describe a hypothetical example of a positive shock/shifter on the supply side of the coffee market? Ceteris paribus, what would you predict the effect to be on the supply curve, equilibrium price, and equilibrium quantity? Depict this change in your figure and tell the story like it would be reported on Bloomberg.
- (b) What is a potential long-run condition brought about by this shock? As profits in this market trend upward after your shock, what do you expect to happen to the market structure in the long-run? Be specific (there are numerous correct answers).
- (c) If the advertising elasticity of demand is 3.4, what effect will a 1% change in ad spending have on quantity demanded in this market? Is demand ad sensitive?